Privileges, costs of membership in that other Asian development bank

The American comedian Groucho Marx once famously declared, “I don’t want to belong to any club that will accept me as a member.” The Philippines may well have taken that to heart when it comes to China’s latest economic initiative.

And that’s no laughing matter, but a critical choice to make, given the state of China-Philippines relations. 

When 50 of 57 prospective founding members of the new Chinese-led Asian Infrastructure Investment Bank signed on in Beijing to the new international financial institution’s Articles of Agreement the end of last month, the Philippines was conspicuous among the 7 nations that held back.

Denmark, Kuwait, Malaysia, Poland, South Africa and Thailand were the other nations that did not sign the accord, though all have until the end of the year to do so.  Reasons vary. Officially, the Philippines continues to “study” whether or not to join.

Said President Benigno Aquino earlier at a Nikkei event in Tokyo on June 3, “I think it behooves our sense of fiscal responsibility to look at how the governance structure of the AIIB will be, so that the economic help that is supposed to be afforded will not be subject to vagaries of politics between our countries and the lead proponent.” 

More simply? The context and the “cost of membership” are clear.

The Philippines has brought its territorial dispute with Beijing over islands in the West Philippines Sea – aka the South China Sea – to a United Nations arbitral tribunal. In such times, some ask, why give China another “easy win” and a communications victory.  The AIIB may well prove to be a rival to the Manila-based Asian Development Bank and a route to further strengthened Chinese economic engagement and political involvement across the region.

Yet, with or without the Philippines – and the nation’s shareholding and voice at the new AIIB would be well below those of largest shareholders China, India and Russia – the new international institution still has some important questions to answer.

For those who have joined the AIIB club, now comes the challenge of translating what is on paper into a world-class financial institution that will help meet Asia’s infrastructure financing needs while also safeguarding the environment and the livelihoods of impacted people. 

China has made clear its plans for an institution that will act more quickly than bureaucracy-bound rivals. That’s music to the ears of borrowing nations – including some in the Philippines who might benefit from funds that the country could access by joining the new development bank. 

Execution matters

Here are three important questions for this new Asian development bank.

First, can China and other AIIB shareholders go from rhetoric to reality in building a “lean, clean and green” international financial institution?  Execution matters. Clear metrics, strong safeguards and a strategy for implementation are essential.

This will not be easy if shareholders are caught up in the battle for procurement and personnel appointments that has at times plagued other multilateral organizations, including the World Bank and ADB. One clear indicator of the unwritten influence of China will be what percentage of AIIB staff and leadership will go to Chinese citizens, as well as what share of future procurement on AIIB-financed projects goes to Chinese state-owned enterprises. Transparency and accountability will be true tests of the AIIB once it is up and running.  

Second, can China act as consensus builder and respect all AIIB shareholders even as it continues to pursue its national interests. This is of particular import to the Philippines and others locked in disputes with China. Indeed, China’s increasingly assertive stance has brought it into conflict with Vietnam, Indonesia and India among other potential borrowers from the AIIB.

Here, China’s past actions at the Asian Development Bank underscore why there is legitimate concern over China’s future behavior at this newest of international financial institutions. During my time on the ADB Board of Directors, I saw firsthand how China’s domestic and international political agenda forced the ADB at times to change course.  

In one case, China refused to grant permission to ADB staff to visit the city of Fuzhou to investigate an alleged case of non-compliance with the bank’s safeguard policies. In another case, efforts to provide assistance in one of the poorest parts of India, known as Arunachal Pradesh but claimed in part by the Chinese, also were stymied by China.

Third, to what degree will China and all other AIIB shareholders focus not simply on lending more money faster, but also on results by addressing the “little bric” – the bureaucracy, regulation, interventionism and corruption – that holds back much of Asia’s sustainable development. This will include encouraging a rule of law and a system of good governance essential to the private-sector led growth. 

The Philippines should also take this to heart. The long-term solution to filling Asia’s infrastructure financing gap including in the Philippines will not be found at any international financial institution – no matter how big the AIIB, or ADB for that might matter, might eventually become. Change and reform must begin at home to attract investment.

Ultimately, the AIIB may well force other multilateral organizations to be more efficient and more effective. The challenge is to ensure that competition driven by the AIIB over projects and programs does not result in a race to the bottom when it comes to social, environmental and other safeguards.

In the run-up to the recent signing ceremony, numerous western nations were won over to join the AIIB as founding members despite the reported objections of the United States and Japan, the only two major global economies who declined to join the AIIB. 

The challenge to western shareholders in particular will be to show now that their own commitment to shaping from the inside the AIIB into a better bank is more than words alone. Skeptics who maintain that founding members were driven primarily by hopes for future personnel placements and procurement awards will need to be proven wrong. Results will matter more than anything else in silencing critics. 

Going forward, the Philippines by year’s end must make its decision to sign on or not to the AIIB. That decision to “join the club” must go beyond factoring in the costs of capital committed or the “privilege” of loans the country might hope to receive in return. 

All major international financial institutions are ultimately political creations of their lead proponents – despite any soaring language to the contrary. That too is what the Philippines will be signing up for at the AIIB. – Rappler.com

 

Curtis S. Chin, a former U.S. Ambassador to the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC.  Follow him on Twitter at @CurtisSChin.